What Is a Close Position?
Closing a position refers to executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back. Taking offsetting positions in swaps is also very common to eliminate exposure prior to maturity.
Closing a position is also known as "position squaring."
Key Takeaways
- Closing a position refers to canceling out an existing position in the market by taking the opposite position.
- In a short sale, this would mean buying back the security, while a long position entails selling the security.
- A closing transaction is generally initiated by a trader but, in some instances, it may also be forced closed by brokerage firms if certain conditions are met.
Understanding Close Positions
When trades and investors transact in the market, they are opening and closing positions. The initial position that an investor takes on a security is an open position, and this could be either taking a long position or short position on the asset. In order to get out of the position, it needs to be closed. A long will sell to close; a short will buy to close.
Closing a position thus involves the opposite action that opened the position in the first place. An investor who purchased Microsoft (MSFT) shares, for example, holds those securities in his account. When he sells the shares, he closes the long position on MSFT.
The difference between the price at which the position in a security was openedand the price at which it was closed represents the gross profit or loss on that security position. Positions can be closed for any number of reasons—to take profits or stem losses, reduce exposure, generate cash, etc. An investor whowants to offset his capital gains tax liability, for example, will closehis position on a losing security in order to realize or harvest a loss.
The time period between the opening and closing of a position in a security indicates the holding period for the security. This holding period may vary widely, depending on the investor's preference and the type of security. For example, day traders generally close out trading positions on the same day that they were opened, while a long-term investor may close out a long position in a blue-chip stock many years after the position was first opened.
It may not be necessary for the investor to initiate closing positions for securities that have finite maturity or expiry dates, such as bonds and options. In such cases, the closing position is automatically generated upon maturity of the bond or expiry of the option.
Special Considerations
While most closing positions are undertaken at the discretion of investors, positions are sometimes closed involuntarily or by force. For example, a long position in a stock held in a margin account may be closed out by a brokerage firm if the stock declines steeply, and the investor is unable to put in the additional margin required. Likewise, a short position may be subject to a buy-inin the event of a short squeeze.
A close position might be partial or full. If the security is illiquid, the investor may not be able to close all his positions at once at the limit price specified. Also, an investor may purposely close only a portion of his position. For example, a crypto trader that has an open position on three XBT (token for Bitcoin), may close his position on only one token. To do this, he will enter a sell order for oneXBT, leaving him with two open positions on the cryptocurrency.
Example of a Closed Position
Suppose an investor has taken a long position on stock ABC and is expecting its price to increase 1.5 times from the date of his investment. The investor will close out his investment, after the price reaches the desired level, by selling the stock.
FAQs
Closing a position refers to canceling out an existing position in the market by taking the opposite position. In a short sale, this would mean buying back the security, while a long position entails selling the security.
What is an example of position trading? ›
A position trader identifies the trend in the market or the economy and invests in the stocks of those companies accordingly. These trends can be sector-specific, seasonal or even long term trends. A few of the examples of such trends can be expanding demand for electric vehicles, renewable energy generation, etc.
What happens when you close an option position? ›
Sell to close refers to closing out a long position in an options contract. There are three outcomes with a long options contract: (1) it expires worthless, (2) it is exercised, and (3) it is sold. The majority of option holders choose to sell a long options contract rather than exercise it.
What's the difference between selling and closing position? ›
“Closing a trade” means terminating an investment. In the laymen's terms it would be called “selling” a stock or a financial asset. Selling an asset, synonymous with “short selling”, means entering into a contract with a broker, or simply an investment, where you believe an asset will decline in value.
What is close order in trading? ›
A closing order can have a few different meanings in stock trading, however it is generally an order to close an open position at a certain price, whether that be manually or by placing an opposing order. Closing orders are employed to lock profits or minimise losses.
How do you calculate position in trading? ›
A stop-loss level is a predetermined price where your trade will close automatically to prevent further losses (in case the market moves against you). Calculating position size involves determining and then dividing your risk per trade by the risk per share.
Which trading is best for beginners? ›
Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.
Does close position mean sell? ›
A closed position is a trade that is no longer active and has been closed by a trader. To close a position, you need to trade in the opposite direction to when you opened it. For instance, if you take a long position on a stock, you will have to sell an equal amount of stock to close your position.
Do you get money when you close position? ›
When traders close a futures position for a profit their account balance will increase. If the trader closes the futures position for a loss the funds are withdrawn from the traders account and their account balance will go down.
How to close option trade? ›
The quickest way to close out your position is to enter the offsetting order with a market price. Simply put, this means that you sell a stock option that you have already purchased to someone else at the closest price available. In a fast moving market this can help save thousands of dollars.
Example: Sell to Close for a Profit
If the price of the underlying asset increases more than enough to offset the time decay the option will experience (the closer it gets to expiration) then the value of the call option will also increase. In this case, a trader can sell to close the long call option for a profit.
When to close a trade? ›
Analyze the momentum of the market. If the trend is strong and in the trader's favor, it may be advantageous to let the trade run. Conversely, if momentum is waning or showing signs of a reversal, closing the position to protect gains or limit losses becomes prudent.
Should I sell at open or close? ›
Sell-to-Open writes a new options contract, while Sell-to-Close closes an existing options contract. Sell-to-Open benefits from time decay and lower implied volatility, but can result in steep losses and be affected by increasing volatility.
What is open and close position in trading? ›
What is an open position? An open position is a trade which is still able to generate a profit or incur a loss. When a position is closed, all profits and losses are realised, and the trade is no longer active. Open positions can be either long or short – enabling you to profit from markets rising as well as falling.
How does after close trading work? ›
After-hours trading allows for stocks to be traded after the stock market's regular hours. However, investors should be prepared for their orders to not be filled as quickly (or even at all) due to the lower trading volume during these extended market hours.
What is a limit order to close position? ›
A limit-on-close (LOC) order is a limit order that is to be executed at the market close. Limit orders control the price that is paid for a security, or what price a security is sold at. The additional "on close" parameter means the order is only executed if the closing price is within the price limit of the order.
What do you mean by position trading? ›
A position trader buys an investment for the long term in the expectation that it will appreciate in value. This type of trader is less concerned with short-term fluctuations in price and the news of the day unless they alter the trader's long term view of the position.
What is the basic position trading? ›
Position Trading is a strategy in the financial markets in which the investor takes a view of the investment for long term and put their money into assets like bonds, stocks, commodities, currency, etc.
Is position trading risky? ›
Limitations of Position Trading
A position trader may identify multiple trends at the same time. However, taking a position on multiple stocks will demand high capital to be invested. In case of any price swings in the market, there is a risk of suffering a loss as well.
What is the meaning of position trader? ›
A position trader is a type of trader who holds a position in an asset for a long period of time. The holding period may vary from several weeks to years. Other than “buy and hold”, it is the longest holding period among all trading styles.
